Industry Groups to Watch

01/14/2010 11:00 am EST

Focus: STRATEGIES

Thomas Aspray

, Professional Trader & Analyst

Stocks have started off the new year on a positive note and the new highs in the NYSE Composite Index have been confirmed by both the A/D line and the number of stocks making new highs. The only concern on the horizon is that the A/D line on the Nasdaq is lagging prices. There are several industry groups that have just broken out, suggesting they should be the best performers over the next few months. There is also one that appears to be bottoming, and all have some interesting stocks that we will take a look at. The charts are updated through January 8, 2010.


Figure 1 - Click to Enlarge

The Dow Jones Steel Index was sharply higher this week, closing above the major 38.2% resistance level. The 50% resistance level stands at 338, which is about 16% above current levels. More importantly, the RS completed a bottom formation this week (point 1) as it moved above resistance at line a. The strength in this industry should have positive implications for the economy as a whole.


Figure 2 - Click to Enlarge

Steel Dynamics (STLD) has also broken out on the weekly charts, closing well above the September highs at $18.56, settling the week at $20.19. Now that the 38.2% resistance has been overcome, the 50% resistance is at $23, about 15% above current levels. If the rally from point c is equal to that from points a to b, the target is at $26, with the 61.8% resistance at $28.50. First good support is at $16.50, with major support at $13.50. The OBV has overcome its major resistance (line 1) at point d, and is not far below the highs made in 2008. This suggests the breakout is valid. Other steel stocks you might take a look at are: AKS, WOR, and NUE.


Figure 3 - Click to Enlarge

The coal stocks turned higher in late December as the Dow Jones Coal Index has gained over 25% in the past month. The major 50% retracement resistance stands at 435 with the 61.8% level at 510. A break below the uptrend, line a, and the support at 290, would be negative. The RS chart has just overcome year-long resistance at line b, and the pattern does look bullish for this group, point 1.


Figure 4 - Click to Enlarge

The long-term chart of Westmoreland Coal (WLB) looks quite interesting as after reaching the $33.50 level in 2006, it began a multi-year slide. It bounced sharply from the November 2008 lows at $5.30, but the rally failed at $12.10, point 1. WLB then turned lower again and made a final low of $4.61 in March 2009. This week, the initial downtrend was overcome, point 2, suggesting we will see a test of the November highs at $12.10. A close above these highs and the 38% resistance level should complete a major bottom. The 50% resistance level is at $14.80 with the long-term downtrend, line a, and 61.8% resistance level in the $17-$17.60 area. The OBV is acting stronger than prices as the two-and-a-half-year downtrend, line b, has just been overcome (point 3). It is also positive that the OBV is already above the late-2008 highs.

NEXT: More Sectors and Stocks to Watch

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Figure 5 - Click to Enlarge

The Dow Jones Gambling Index violated its weekly uptrend over the past two weeks, but then rebounded sharply, closing very strong, which should reassert the uptrend. The rally that terminated in mid-September just reached the major 38.2% retracement resistance.

The 50% resistance—and the next likely upside target— are in the 500 area, over 30% above current levels. The gambling index completed a strong bottom formation in March as the RSI bottomed in October 2008, point 1, and then formed a higher low at point 2 as the index was dropping to new lows in March. This bullish divergence, line d, was confirmed when the RSI moved through resistance at line c during the week of April 4. The RSI did confirm the September highs and has now moved back above its WMA, holding well above its uptrend. The RS analysis (not shown) also turned up, but needs a stronger rally relative to the S&P 500 to reaffirm its uptrend.


Figure 6 - Click to Enlarge

Wynn Resorts (WYNN) bottomed in March just below $15 as the weekly technical studies did not confirm the lows. The weekly triangle formation (red lines) has just been completed, suggesting that the recent highs and the 38.2% resistance at $75 will be overcome. The upper trading channel is currently at $88, with the 50% retracement resistance and a Fibonacci projection using the July-to-September rally both in the $95 area. Volume was strong this week and confirmed the price action.


Figure 7 - Click to Enlarge

The Oil Equipment and Services Index put on a strong performance this week as it closed above the October highs, line a. The weekly uptrend, line b, was tested in December. The RS has moved back above its flat WMA and needs to overcome resistance at line c to confirm the price breakout. The 50% resistance is at 590 with the 61.8% retracement level at 670.


Figure 8 - Click to Enlarge

Superior Energy Services (SPN) is one of the many oil services and oil-related stocks that closed the week strong. The close was above the October highs, which is positive, but the trend line resistance (line a) has not yet been overcome. Once above line a, the 38.2% resistance is at $29.10 with the 50% retracement level at 34.50. The OBV did move slightly above its resistance at line c, but heavier volume is needed to support a more bullish stance. Any pullback from the recent highs should hold in the $22.70-$24 area.

NEXT: A Closer Look at the Homebuilding Sector

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Figure 9 - Click to Enlarge

The Dow Jones Homebuilding Index had been in a gradual downtrend since the 2009 summer highs, but turned higher three weeks ago. The decline held well above the former downtrend, line b, which is now converging with the shallow uptrend, line c. The monthly momentum analysis does suggest that this index has bottomed, but it needs to surpass the resistance at 315 to confirm. There is additional resistance at 375, with more important resistance at 424, line a. The RS analysis is neutral at best given that while the RS is back above its WMA, it is still well below the key resistance at line d.


Figure 10 - Click to Enlarge

Hovnanian Enterprises (HOV) has been testing its weekly uptrend, line b, over the past five weeks. The weekly downtrend, line a, was overcome last summer. On a chart basis, HOV needs to overcome the resistance at $5.75, which corresponds to the August 2009 highs and the 38.2% resistance level. If this resistance is surpassed, the 50% resistance level is at $7.00. The $3.20 level is a key area of support. The OBV broke through its downtrend, line d, in late March and has made a series of higher highs. It has also recently moved above the early 2008 highs, which is a bullish sign. Even though the bottom in the index has not yet been confirmed, the risk control and strong OBV make HOV worth a look.

As I have mentioned previously, whether you are an investor or trader, I believe that you should spend an hour or two each week looking at the different sectors and industries. I think this will be well worth the time as many of the important turns in the sectors or industries have been highlighted in our daily chart feature. For example, in this early-March analysis, I discussed the upside breakout by the technology sector versus the S&P 500, and the tech stocks then had a great run for the rest of 2009. For traders, this process will help them find stocks that may have the best short-term trading potential, while investors can adjust their portfolios to be sure that the strongest groups are represented inside.

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